Tuesday, January 19, 2010

I am glad I asked on the fund names because my choice, Topaz Funds, has come in last place.

Of the people's victors, Cobalt and Emeritus were the top 2 vote getters, with Orchid, Proton, and Azure essentially tying for 3rd place.

I've received some interesting suggestions in comments and email. I do have a good list of new adjectives to add to the ones I've been working with - words like dextrous, agile, persevering, vibrant from one reader along with speed, alacrity, or depth from another. How to find a noun or verb that would be a good representation of these words, is the open question.

Also some of the comments made me think more along flexibility and adaptation. So as I "googled" I found a lesser known Greek God: Proteus. A lot of interesting connections as this is the "first" mutual fund born like this.

In Greek mythology, Proteus is an early sea-god, one of several deities whom Homer calls the "Old Man of the Sea"[1], whose name suggests the "first", as protogonos (πρωτόγονος) is the "primordial" or the "firstborn".

And Proteus is all about form changing, and adjusting

He can foretell the future, but, in a mytheme familiar from several cultures, will change his shape to avoid having to; he will answer only to someone who is capable of capturing him. From this feature of Proteus comes the adjective protean, with the general meaning of "versatile", "mutable", "capable of assuming many forms". "Protean" has positive connotations of flexibility, versatility and adaptability.

So this would be the perfect name if only I knew 1 person who actually had heard of this word. Being a relatively SAT Verbal adapt person, I have never heard of "protean" which apparently is an adjective in English ... certainly not among my peer group.

Now if only this were a few thousand years ago, and we were in southern Europe - I'd have a very well known name that anyone off the street could connect with.

Back to the thesaurus and Wikipedia which is like the World Book Encylopedia for the new generation.

I've advocated that the 401k plan is going to be revealed as a massive disaster for the private sector American worker - of course many in the private sector never have been exposed to this paradigm shift and enjoy the old school pension plans. But asking said private workers to invest with a 30 year time frame, with a prudent savings discipline, and then having them make investment choices (with most Americans never taking a basic economics or finance class of a high school level) had all the makings of a disaster. As we wrote a year ago in [Feb 7, 2009: WSJ - 5 Ways to Fix Up Your 401k Plan]

The move from pensions (which are unaffordable to companies in a global competition versus peers who do not need to fund them) to 401ks (which require diligence, stable job participation, 30+ year time horizons and financial acumen; all things severely lacking in the U.S.) will prove to be a long term disaster... but since it won't all explode in a 3-4 year time frame like the mortgage mess, this will be an issue that will come to the fore front over the long run. When many baby boomers realize they are going to be working "til they drop". (not to mention the cost is punitive to most small businesses, which employ the majority of Americans)

Savings is not part of our culture anymore. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] Delayed gratification is not part of our culture anymore. And asking people to make investment decisions, when they have little to no exposure to the investment world, is a joke upon itself. You see how many "do it yourself" home improvement projects work out, right? Eventually a professional is called in to fix the mess the DIY person did. Or better yet - are you asked to do surgery on your friends? Or do you get a professional? Yet somehow everyone is supposed to be an expert in "investing" with just a few hours a month of time spent (if that). [please note - this is not to say many "professionals" in the investment world have done a good job taking care of their clients either! It's all relative]

As with all things in Cramerica the push away from defined benefits was a great thing for corporations. The risk was moved from the corporation to the worker, what is not to love? [Oct 20, 2009: WSJ - Slump Prods Firms to to Seek New Compact with Workers] Even in the best of economies, and best of stock markets this would of ended up in horrors for reasons I listed above. But throw in a bubble economy with a bubble stock market (with 2 crashes in a decade) - not to mention the fact that when needed the corporation can just walk away from matching [Jun 23, 2009: Companies Say Cuts are Here to Stay] (which is the only part of the 401k plan that in any way mirrored the definded benefit plan) and you have the steaming mess we have now.

(please note - this discussion does not touch on the larger question of SHOULD corporations be involved in retirement and healthcare benefits; this is largely a US centric thought process)

Annuities seem like a reasonable middle ground, although the new age version needs to have far lower fees than the current private sector crop. There needs to be a widespread retirement product that guarantees a steady stream of income - the 401k has proven to be a farce, and with the average "kitty" of something under $50K that should last the average American a good... 2-4 years. Living on Ramen Noodles.

If these new proposals do catch mindshare, we can expect a massive win for (drumroll) the insurance companies . I can almost see the lobbyists salivating from here. That said, while not the perfect solution I am not sure what else could be offered in the imperfect world of retirement savings, that would save the most amount of Americans from themselves. Effectively the annuity would be a self funded pension program... for those who can still save after a decade plus of inflation adjusted wage stagnation. [Apr 30, 2009: First Quarter Labor Costs Rise Least on Record]

The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Annuities generally guarantee income until the retiree’s death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.

“There’s a real desire on a lot of people’s parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime,” said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.

The average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages. The average balance of the Fidelity accounts recovered to $60,700 as of last Sept. 30 as the stock market rebounded. (that extra $13K should get the average retiree through another 6 months of enjoying the 'good life')

For investing purposes - eventual winners may include:

Promoting annuities may benefit companies that provide them through employers, including ING Groep NV and Prudential Financial Inc., or sell them directly to individuals, such as American International Group Inc., the insurer that has received $182.3 billion in government aid.

Oh the irony!

Retirement plans, including 401(k) accounts, held $3.6 trillion in assets at the end of the second quarter of 2009, while annuity investments of all kinds totaled about $2.3 trillion.

The top sellers of individual annuities in the U.S. include AIG, MetLife Inc., Hartford Financial Services Group Inc., Lincoln National Corp. and New York Life Insurance Co., according to figures from the American Council of Life Insurers for 2008. The top group-annuity sellers include ING, Prudential Financial, MetLife and Manulife Financial Corp.

Other options:

In addition to annuities, the inquiry will cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain age, she said.

“There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income,” Iwry, a senior adviser to Treasury Secretary Timothy Geithner, said in an interview. “The question is how to encourage it, and whether the government can and should be helpful in that regard,” Iwry said.

Of course when it comes to the bottom line in Cramerica - it's all about the people lobbyists. While the insurance lobbyists are giddy - the asset managers lobbyist are screaming about the dangers of such a move. Much like buying drugs from Canada! They will kill you! Don't make the switch away from the 401k model!

Asset managers are concerned the government may go too far in encouraging annuities, said Mike McNamee, a spokesman for the Investment Company Institute.

As stated above, today's version of annuities are fee rich, and not quite so wonderful - perhaps more competition is needed in the space to provide better products.... lobbyists for the industry however would object saying only the insurance companies specialized expertise would be helpful to the American people.

John Brennan, the former chairman of Vanguard Group, the Valley Forge, Pennsylvania-based mutual-fund company, criticized annuities today as often expensive and offering little inflation protection.

But there is always incremental improvements.. if only we had a will... and less lobbyists.

AARP’s Certner said policy makers could avoid many of those pitfalls by encouraging the use of group annuities, which are bought by employers rather than individuals and often carry lower fees, or using approaches that provide retirement income without commercial annuities.

Of course at the end of the story is some person living about 2 generations ago... ah, the simpler life when we could all live like public workers ;)

A better approach would be to give employers incentives to revive defined-benefit pensions, which have languished as employers have focused on cheaper and more flexible 401(k) plans, Ferguson said.

Full disclosure - I've spent some 2 weeks working on the simplest of tasks: coming up with a mutual fund family name. Sometimes the most simple things take the longest. I've gone through hundreds of names - almost all the things I thought of on first glance were taken by either a mutual or hedge fund in the US or UK, hence dismissed. As was anything with a copyright. I've looked through everything from Roman demigods to volcanic rocks - and everything in between. Flora? Fauna? Been there - done that. After countless choices I asked a small pool of people for opinions, but not one name in my final pool gathered a consensus. Hence I am looking for a wider opinion base.

I am looking for something relatively short (2-3 syllables), relatively easy to pronounce, and something most people will have a clue what the word means. It needs to work well with a longer mutual fund name i.e. XXX Absolute Return.... or XXX International Equity.

I've closed in on a choice with 98% certainty (one of the choices below)... unless there is a watershed victory for one of the other names, we'll have the name locked in by tonight. Feel free to vote and I hope my mental victor is one of the leaders.

It's earning season again and you know what that means... speculators moving the value of an entire corporation (yes folks, there are real businesses behind these 3-4 letter symbols!) up or down 10-20% based on 8 seconds of headline reading of a 90 day period of business. While I enjoy getting updates on business I simply hate the student (lemming) body left reactions, although I understand so many of the retail crowd love the rush of the big gamble. I'll leave that activity for Vegas.

Skyworks Solutions (SWKS) is our largest individual position and while in a decent uptrend it has not broken out like I had hoped. It looked very promising last Thursday but the market selloff stymied the stock Friday. This is a very slow motion movement, but it's been doing far better than its laggard peers. I usually reduce exposure of everything going into earnings because the last thing I need is a 25% haircut on a large position based on hair trigger reactions to a headline by people who don't even bother to read the earnings report itself. It limits the gains from such lemming movements (beat by 7 cents? buy buy buy!), but 50/50 outcomes have nothing to do with investing - it's simply gambling.

We are selling 55% of our stake at $15.00 and as long as nothing out of the ordinary happens tomorrow evening, will return back to the full position in 48 hours. If something "bad" happens and the stock gaps down or breaks the shiny red line, we'll sell the other 45%. We have very modest gains of under 5% on this batch of sales.

Those red numbers in premarket were extinguished in a flurry of buying off the opening bell. As I type the S&P 500 sits at 1146 and we soon approach our pivot point of 1150 yet again. I am leaning very heavily to repeating the exact same strategy executed successfully last week and that is to drop much / most of the index long exposure as we run into mid/upper 1140s and then rebuy it on a clean break of S&P 1150 ... perhaps 1152+. Or (as happened last week) rebuy the exposure on a pullback.

The more times we make an attempt on a level, either as support or resistance - the more it weakens and we should break through it.

EDIT: Sold half the index ETFs and all the call options on the early morning gift. Will re-acquire around S&P 1152 or on a pullback.

First, for all the complaining about CNBC (including from this voice) there are a handful of actual solid reporters there - they just don't happen to host (Mike Huckman in pharma, David Faber). Diane Olick does a fair and balanced job on the real estate beat - looking beyond the NAR's (always rosy) cheer while digging deeply into foreclosure data and the like rather than just presenting the mainstream spin. She has quite the story below. Once more, our financial oligarchs are at the center of the mess, running unchecked and skirting gray areas - not to mention skipping between black and white. I won't profess to be a real estate expert - or a short sale expert - but judging from the avalanche of comments on the CNBC website for this story, a lot of people have had this happen to them and various professionals in the business are speaking out against it. And when it comes to oligarchs, where there is smoke there is generally malfeasance.

Even "He Who Walks on Water"' aka your Next Treasury Secretary (as the revolving door between the banks and D.C. churns) has his banks hands all over this. Color me shocked. I mean what else do you expect when we've concentrated more and more power into fewer hands - right? [Sep 18, 2009: 3 Oligarchs Now Dominate Mortgage Market - All Backstopped by You] Whatever the antithesis of competition is... Cramerica style.

There is a 3 minute video attached (for email readers) if you prefer to not go through all the words - you can also follow the link to get a smattering of comments from people who are involved in this for a living. One must wonder what sort of regulators we have when something so apparently prevalent cannot be sniffed out by those who oversee the oligarchs.

p.s. the realtor who is willing to speak out on this (alleged) fraud is located in Phoenix, so if you are in the market and want to reward people with morals...

**************************

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks. I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1800CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he's been receiving all kinds of questions and complaints about trouble with second lien holders.

As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used "piggy back" loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don't qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien. If they don't, and there's no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn't have to agree, but more and more are doing so. That's all legal.

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, "That's a red flag!"

Clearly illegal.

Brandt told me he's heard from at least 200 agents that they've had these requests made by representatives of Citi Morgage (C), JP Morgan Chase (JPM), and Bank of America (BAC) and other large banks.

Most agents wouldn't go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

"I think it's wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client," says Gentry matter-of-factly. "Aside from being illegal and a violation of RESPA, it's immoral and truly it's just sad for the client that it's hurting."

Gentry says she has had the requests made three times and claims she lost one sale because of it.

"The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase."

JP Morgan Chase simply answered, "No Comment," when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written statement:

"Bank of America enforces a policy that all disbursements are documented on the settlement statement for short sales. When we are servicing a first mortgage with a second lien held by another investor, if the second lien holder asks for off-HUD payments, we will not approve the transaction (if we have knowledge of it). It is also against Bank of America’s policy to accept off-HUD payments on its second liens."

Citi 's reply was a bit more complicated:

“We work very hard to help distressed homeowners find solutions for their financial challenges. In our attempt to amicably resolve the debt, we will generally negotiate a reduced settlement with the homeowner in order to release a second lien. Unlike some lenders who refuse to reduce the payoffs on second liens, we choose to reduce the payoff amounts in some situations to assist the borrower. We do not provide instructions to settlement agents on how to fill out the settlement statement or any other closing documents, and we certainly do not require settlement agents or any other parties to violate applicable laws."

"When we confront the lenders and tell them that this request is illegal and a violation of RESPA, they tell us it's been cleared through legal and they don't care. Do it anyway," charges Gentry.

I personally heard a recording of a phone conversation between a short sale real estate agent and a second lien lender, during which the second lien lender clearly asked for cash outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the recording was given to me by Brandt who got it from the agent. The agent would provide no information on the lender, for fear of retribution):

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You're not going to lose your license - we have plenty of realtors who do this, who actually understand how this whole process goes - and they realize that OK, if I want to get this done, this will take place."

I contacted the Treasury Department, HUD, FINCEN (Financial Crimes Enforcement Network) and the Federal Trade Commission, and none of their representatives could tell me of any active investigation into this. The folks at HUD said they'd be very interested to see my story.

Monday, January 18, 2010

It simply is fascinating from an economics viewpoint to watch what is happening on the 2 ends of the Earth - East v West. Reading so many stories of the East remains akin to reading what must of been in the newspapers in the West in the 1950s/1960s. However, unlike in that era where international borders meant much more than they do now - we had at least 2 good generations worth of good times before global wage arbitrage began inflicting its punishment. I doubt the current workers enjoying these newfound gains will have 2 generations to benefit before the work is moved to an even cheaper locale. But in the new paradigm stock market "long term" is next week, so we can't worry about the implications 20 years out.

My only advice to these Chinese is not to ask for too much of a wage increase because the next thing you know - your plant is moved from the Eastern, coastal side of China to the Western, rural side where wages will be even lower. [Feb 28, 2008: China Raising Minimum Wage] You can almost hear the site studies in regions near Mongolia being done from here. Let the global race to the bottom (for labor) continue!

“Little” Xie says he wants to own one of the autos he helps build at Ford Motor Co.’s assembly plant in the Yangtze River city of Chongqing. With his mortgage payment taking about 60 percent of his 2,000 yuan monthly pay, that won’t happen soon. “It isn’t even worth talking about company incentives to help buy a car, since I can’t afford one in the first place,” said Xie, 28, a six-year Ford employee, as he approached the factory gates for his night shift. Xie, whose nickname comes from his youthful age, asked that his full name not be used.

Higher wages for people like Xie would help resolve China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. (yet those higher wages will drive the corporation to move the plant to the next low cost producer - oh such a conundrum when only so many jobs exist int he world) China’s communist leaders might learn a lesson about how to create a more prosperous working class from American industrialist Henry Ford.

The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable workforce and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the Dearborn, Michigan-based company. “This allowed people to increase their buying power and, at the same time, they produced a better product,” Kreipke said. (quaint times indeed, of course Mr. Ford did not have the option of moving his plants 7000 miles away did he?)

Ford’s $5 daily pay allowed an employee to buy a Model T that cost $440 with the equivalent of about four months’ wages. Chinese factory workers averaged 24,192 yuan ($3,544) a year in 2008, according to figures from the National Bureau of Statistics in Beijing, so it would take more than three years worth of wages for them to afford the cheapest car advertised on the company’s Chinese-language Web site: a four-door hatchback with a 1.3 liter engine listed for 78,900 yuan.

Low wages in the world’s third-largest economy are slowing the rise of a consumer culture that Premier Wen Jiabao and President Hu Jintao have said China needs to maintain expansion at the 8 percent a year that will generate jobs for its 1.3 billion people.

That hasn’t stopped China’s auto industry from booming, with sales last year of 13.6 million vehicles, eclipsing the U.S. as the world’s top market for the first time, according to figures from the China Association of Automobile Manufacturers in Beijing. The surge in purchases was spurred partly by government subsidies to help farmers buy autos. (all the world is just a government subsidy machine - the joys of fiat currency)

Encouraging higher pay might help sustain the boom and boost consumption, which currently accounts for about 35 percent of China’s gross domestic product, compared with 70 percent in the U.S. It would also help ease income gaps between the rich and poor, which are higher than those in South Korea and Taiwan at similar stages of development and have led to riots and other labor unrest. (again, easier said than done when your top advantgae is limitless, cheap labor)

While the auto company declined to comment on worker pay, Ellen Hughes-Cromwick, Ford’s chief economist, said Ford projects growth 10 years into the future for the countries where it operates, and it sees China’s economy in a period of expansion characterized by rapid rises in employee compensation similar to South Korea’s economy starting in the 1960s. “We are at a situation where wages are moving up and doubling in a very short period of time,” Hughes-Cromwick said in a telephone interview from Dearborn. “We do expect takeoff to generate pretty substantial wage gains.”

One way China’s government might help boost pay would be to raise the value of the yuan, said Nicholas Lardy, who studies the Chinese economy as a senior fellow at the Peterson Institute for International Economics in Washington. U.S. and European officials have said China keeps the yuan artificially low to boost sales in foreign markets. An undervalued currency encourages manufactured exports at the expense of developing the more labor-intensive service sector, depressing job growth and keeping wages low, Lardy said.

Henry Ford employed some of the millions of eastern European immigrants who poured into the U.S. a century ago, as well as migrants from the South and Midwest lured by high wages. China’s leaders must deal with hundreds of millions of rural laborers coming to cities, who put downward pressure on salaries. “Unskilled workers are condemned for generations to low wages,” Xiao said.

Even a skilled worker like Gong -- who also asked that his full name not be used -- said he makes only 6 yuan ($0.88) an hour as a welder at Ford’s Chongqing plant, 9 yuan an hour for overtime. “I have a dream of someday buying a car,” said Gong, 29, as he walked home in the rain after a 10-hour shift. “I guess it will take six years of saving.”

As I said, simply a fascinating time for the globe - at least if you are an economist. If you are a private sector worker, relying on a multinational corporation - interesting might just be the start of it. [Jan 12, 2010: Jim Cramer is Right]

Weekly thoughtsAfter a rip roaring first week of 2010, the second week was not quite so well received with the S&P shedding 0.8% and the NASDAQ 1.3%. Let us start with the only thing that seems to matter to the institutional money base nowadays - the charts.

For the S&P 500 after breaking out of a long base, the index still remains in an uptrend. Through Monday of last week we had been up every single session of 2010 so some pullback was in order. Both Tuesday and Friday gave us sharp selloffs, essentially falling to the same spot - lower 1130s. But as the chart shows, we have not even penetrated the 20 day moving average yet - which at least would give the bulls something to think about.

As we noted early in the week S&P 1150 was the near term pivot point to the top of the range - and it proved to be true as the week progressed. Quite a few comments from readers in the last week, especially Tuesday on what would get me to change my near term stance of "drinking Kool Aid in high quantities". If we fall back into the box - i.e. falling back below S&P 1120 it would raise concerns. That would not mean we sell off necessarily because for 10 months, whenever this market looked on the edge of breaking apart, miraculous orders come from some "urgent buyer" who is happy to buy SPY contracts at very bad prices, all at once - as long as his purchases strive to lead the algorithms ever higher like the ultimate Pied Piper. But in normal times, when it was not of utmost national interest to create a massive "wealth effect", it certainly would cause concern. Also please note the 2 green circles - one just over S&P 1110 and the other at 1070 - these are 2 tiny gaps in the S&P 500 chart which ultimately will need to be filled. If that is in 2 weeks, 2 months, or 2 years I don't know but generally index gaps get filled much sooner than individual stock gaps (which at times never get filled).

For all the talk of "rotations" and the "NASDAQ" (tech stocks especially) lagging in the new year, I don't see much difference in this chart vs the S&P 500.

And in our "rising tide lifts all boats world" the broader Russell 2000 also looks identical. It's a "dart throwing" time - remember, we are all geniuses right now.

As for the news - economic news has mostly been ignored as most days we see very little reaction to economic reports. The Bernanke Put is in, and good news means good news while bad news = more easy money from the Fed. The complacency of this is extremely troubling and it will eventually end badly. But complacency can go on for a long time, especially with a man at the helm of the country's finances who believes in his mission and will not relent.

With that said, we enter the heart of earnings season and (going with the theme of complacency) we all know the game of US analysts and our corporations. Almost any company worth it's grain in salt is able to lead analysts to some lowball number, which they can then smash and claim "better than expected". For all the hubbub about Intel (INTC) for example - which smashed the estimates - revenue and EPS figures are now the same as they were mid decade. In other words, all we are celebrating is Intel "growing" back to where it was in 2005/2006. Oh joy. Many companies are in similar situations - with much of the "growth" coming from slashing and burning the work force - but this has been the mother's milk for 3 quarters now... how much longer we can continue rallying on the same theme, without a return to real growth is the open question. And I don't mean growth from the utter devastation that was fourth quarter 2008 but something viable and long term. Easy comparisons will be over in about 2 quarters and with few employees left standing it will be interesting to see what corporations come up with next... especially if revenue growth doesn't start jumping as the "economic recovery" textbooks say should be happening.

I do believe this is the era of the multinational corporation who can use wage arbitrage to lower its cost of capital - and these type of companies report in the next 2 weeks especially. IBM is a great example - great "American company" right? Well 70% of revenue and labor is now overseas; and more is leaving by the year. The story won't be quite so bullish for the smaller, domestic focused companies - but most of those report towards the end of the month and early next. Key earnings this week:

While the cheerleaders on financial infotainment TV along with the retail crowd will focus on the Google's, Citigroup's of the world - I will be more interested in the railroad along with some industrial companies (i.e. PPG) not shown on the list above to get an idea of what is happening in the real economy. I won't care if these companies are "beating estimates" - I want to know what the business is like versus last year, versus 3 years ago, or 5. Because almost all of this "green shootery" thus far has simply been a rebound versus desolate abyss levels. If Harley Davidson tells me Americans, flush with cash from no longer making payments on their homes via strategic default, are crowding their dealerships and living it up circa house ATM (2006) era, then we take one stance. If however, HOG has done nothing more than cut thousands of jobs to "make the number" along with their normal financing tricks - than this quarter is no different than any of the last 8-9.

On the economic front - a relatively quiet week. Wednesday brings housing starts (we should hope the answer = 0, since we have 18 million empty homes), and the Producer Price Index. Thursday brings leading indicators - and that's about it. This week will be about earnings, especially of the financial kind. Was Friday's selloff to good news a warning flare or just a day the PPT took vacation? We'll see.

For the portfolio, we are a bit more defensive than last week but still skewed bullish as long as the index charts hold up - some of our lower long exposure was due to a few individual stocks breaking down on their charts causing us to exit or take stop losses. We did close quite a few positions of laggards last week - Gafisa (GFA) [weak chart], Myriad Genetics (MYGN) [analyst ruined the chart with a downgrade], Humane Genome Sciences (HGSI) ]broke some support but nothing game changing - might return to this stock soon] We traded around some positions - covering our short of our bond ETF early in the week, and then beginning to rebuild it later in the week. A limit order to buy for DragonWave (DRWI) at a "gap" was filled early in the week, which we were able to sell (half) later in the week for a 11% gain in 2 sessions. After locking in a 21% gain on Telestone Technologies (TSTC) at the beginning of 2010, we rebuilt our position throughout the week. Almost all TriQuint Semiconductor (TQNT) was sold on an increase in guidance - however we wanted to see the stock break out of its range to keep or add to the position; it was unable to do so this week; maybe next week. Assured Guaranty (AGO) position size was increased on a potential (slow motion) breakout. A stop loss on SourceFire (FIRE) was triggered - it is yet to be determined if we were head faked out of the majority of our position or not.

It is always constructive to look at the "other side" - if nothing else to see what the herd might be thinking. This is the first time I have heard of Ms. Thouin but in as much of a recovery as we do have, I do agree with her themes that it is going to be focused on the corporation, or Eastern hemisphere consumer... not the Western consumer - especially of the American kind. (except those domestic breed who work in government, or live in the upper 5% economic band) Frankly that is how the portfolio is positioned for the most part.

Perhaps with a European bias she views the world differently; but claims that we can indeed have a V shaped recovery only with the corporation - which begs the question, without end demand what do said corporations do with their rebuilt inventory? I suppose in our current structure the government gives the consumer money it does not have, and consumers use that money to buy the product.

If Ms. Thouin is right this will mark a sea change - the first time the globe does not need the $14 Trillion economy of the United States (70% of which is consumer consumption) - but can go along it's merry way with smaller tier of Asian economies leading the way. My view? In 15 years she has a valid argument. Right now - based on the divergence in sizes of the economies it is an impossible dream with 1 strong caveat. My comments are on a purely organic economy where governments are not borrowing / printing like mad to subsidize their consumers.

The recovery won't be bolstered by the consumer, like in previous recessions. Instead demand will come from a build-up of low inventories and large companies' exposure to emerging market growth, Edith Thouin, vice president of ABN Amro Private Banking said Monday.

"We do think we are in a V-shaped recovery and equities are the place to be," she said, adding that investors should still shift their focus into a more diversified portfolio.

She told CNBC investors should bet on industrial and base material companies, as well as international companies with good exposure to China, South America and other emerging market countries.

"The appetite for especially anything exposed to the growth markets in Asia, in Latin America, is still very attractive to investors and because private investors have been holding back here — they really haven't participated in this rally — it's good to lure them back into the equity markets," Thouin said.

She likes global miner BHP Billiton (BHP) in the base material sector, as well as steel companies like Arcelor Mittal and ABB. Engineering companies like Siemens and Philips also look good, according to Thouin.

Mid- and small-cap companies, which have suffered recently during the downturn, hold investment potential as they will benefit in the pickup in inventory activity as they often supply larger companies, Thouin said.

"We would focus on the high-quality companies in the mid-segment. The ones with good balance sheets; the ones that have come through the crisis well enough; and the ones that also have very high market shares and very good reputations, because they will be the preferred suppliers to these large companies as the large companies continue to merge and consolidate," she told "Strictly Money."

A recovery in industrial companies has been priced in by the market, with good earnings expected in the fourth quarter of 2009, as well as the first and second quarter of 2010, according to Thouin.

"We actually think that defensives are coming a bit back into fashion again," she said. "There will be a renewed interest in the defensives sectors, especially the ones that continue to show good earnings growth. For instance the pharmaceuticals sector but also the consumer staples (sector)."

Luxury goods producers like Richemont, who reported good figures Monday, are attractive as "there is this huge demand from Asian consumers, especially for Western products," she said.

Sunday, January 17, 2010

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

Friday, January 15, 2010

Thought it would be helpful to review positions we have exited over the past 3-4 weeks to see how they have done since we left. Almost all of these (perhaps all) were sold due stocks that had broken support, and I believed better near term money making opportunities could be found somewhere else. Let's see how that worked out.

Perfect World (PWRD) - huge rally on first day of the year helped the stock out; since then it's been hovering around the 50 day moving average. Should be making a larger than average move relatively soon, but no large lost opportunity here at this time.

CNInsure (CISG) - one of these charts that is completely at odds with my style of trading around a core position. Each time it would break over the 50 day moving average I would be adding to a core position, and vice versa each time it fell below. Which means I would have lost money chasing my tail on this one. Until it starts to behave, it's a no go.

E-House Holdings (EJ) - very good decision. This is the only stock I have considered shorting the past month, and I should of gone with that theme. Not only did it fall back each time it tried to jump over the 50 day moving average, it has now fallen below the 200 day. I am wondering what the stock performance is telling us about the Chinese real estate market.

Gafisa (GFA) - good decision. If the stock breaks mid $28s it might have a visit with the 200 day moving average near $27.

Morgan Stanley China A Share Fund (CAF) - after I sold on a break of support the closed end fund raced higher, but now is back around where I sold. Hard to assess this name because aside from the underlying performance of the stocks, there is a random premium / discount to NAV which is impossible to model ahead of time.

Discover Financial Services (DFS) - no life in the stock since we sold; it clings to the 50 day moving average but from below. A good low risk entry short actually, with a stop loss on any break north of the 50 day. However, unless the market breaks down it seems this stock will not ... just marking time.

Blackstone Group (BX) - bounced back above a moving average, after I sold it - but has since given back some of its gains. Another stock just hanging out by its 50 day moving average; only worthwhile for people with far shorter time frames than me, for trading purposes. A break over $14.25 would be a positive.

Baidu (BIDU) - well we only had 1 whopping share, but the Google (GOOG) news of a pullout caused the shares to spike. I don't consider that a failure as news events are impossible to predict. After we sold the stock fell to a new lower level, before the news event helped change the game.

Fuel Systems Solutions (FSYS) - the volatility in this stock might be the highest in anything I track. 8-10% moves are now common; while fun for daytraders - it tends to wreck havoc if you are trying to use charts. The movements also seem completely random at times; without news to support them. Along that line of thinking, the stock rallied sharply after I sold it - on no news - and now is back near where I sold it... on no news.

Myriad Genetics (MYGN) - sold earlier this week after an analyst downgrade ruined the chart. After a cursory bounce it's breaking down again.

Human Genome Science (HGSI) - so far it remains below where we sold it earlier this week. But the story is not over as long as $28 holds. If it can begin to ramp again, I could see a return to this name but thus far the correct move.

All in all, I am pleased with the decisions. Other than Baidu (our smallest position when sold) - in which the stock actually weakened after we sold, but an out of the blue news announcement changed the trend - most of the stocks have weakened further or are simply treading water. If "time is money", these are the type of stocks that would sucking up oxygen and offering us little in return. We want to continue to avoid the majority of the charts above until the hurdles they face are overcome. At which point they can run with fewer impediments. If we were in a less steroid / morphine induced market - many of these would be attractive low risk (with clearly defined exit areas) shorts.

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